As I mentioned in my last post, SD and I are by no means tax experts, but we've learned a thing or two about filing taxes as freelancers that I thought might be worth sharing.
This series does not replace talking to a professional - if you're brand new to this, I highly recommend that as your first step! - but it's my hope that these resources and suggestions can serve as a broad introduction to doing your own taxes and keeping good records throughout the year.
Taxes are complicated and they can take up a lot of time, if you're doing things yourself.
Want to know our secret for staying sane? We start the process in January.
We work on some of the tasks below on our own and then sit down a few times over the course of February/March to go through the software together (by the way, we use H&R Block).
Here are a few things you can do to get a head start on your taxes:
1. Gather year-end statements and tax documents.
Some of these come in the mail, others are all online. Take a few minutes to save PDF versions to a folder on your computer and/or gather all hard copy statements into one place. Here's a starting list:
- State tax refund(s) from last year
- 1099(s) (contracting work, interest, dividends/capital gains)
- 1098-t (if you're a student)
- Student loan statements (you can deduct any interest you paid last year)
- Your self-employment income from last year
- IRA/Roth IRA investment totals
- Health insurance premiums (deductible if you're self-employed)
2. Pull receipts and expense records and calculate totals.
That professional conference you attended last summer? Deductible. That lunch you had with someone you mentor (professionally)? Deductible. I sort all of my business-related receipts in an accordion folder during the year; in January, I spend some time calculating totals. Here are a few categories to help get you started:
- Business Travel (air travel, rental car, tolls, hotel, internet charges when traveling)
- Business Meals (usually, you can write off 50% of this total)
- Business-Related Purchases (books, music scores, equipment)
- Business Expenses (website hosting, office supplies, conference registration, dues)
3. Add up miles driven for business.
Driving to and from a gig? Keep track of your mileage! Any time you drive to "work" (a place that doesn't send you a W-2), you can deduct that mileage using the federal mileage rate.
It's best if you can keep something in your car that will prompt you to write down starting and ending mileage for each trip, but if that doesn't work for you, keep track of the dates and destinations and calculate the mileage later. Also, figure out the total number of miles you drove last year (they'll ask for this number, too).
4. Make a list of any charitable donations.
Whether you donate a bag of clothes to Salvation Army or make an annual donation to your Alma Mater, you can report all charitable giving on your taxes.
5. If you paid estimated tax last year, look up these payment amounts (federal and state).
If you make more than a few hundred dollars a year in your freelance work, it's a good idea to make estimated tax payments (federal and state) each quarter (April 15, June 15, September 15, and January 15), since no one is withholding money from your paycheck. You can do this online pretty easily.
A good rule of thumb is to pay 5% of your quarterly earnings to your state and 20% to federal.
When you file your taxes, they'll ask how much you paid each quarter, so have these amounts ready. If you underpaid during the year, you have to pay a fine; if you overpaid during the year, you get a refund (yay!).
Hope this little glimpse into our process is helpful! More ideas, strategies, and helpful hints coming soon in Part III!
Taxes for Freelancers - Part I